Living Trust

Living trusts are among the most popular estate planning tools. When properly structured and funded, living trusts avoid probate and allow the trust creator (grantor) to specify how assets will be administered and distributed after his or her death.

What is a living trust?

A living trust, also known as an inter vivos trust or revocable living trust, is a legal arrangement in which a person (the grantor) transfers assets, such as real estate, stocks, and cash, to a trust while they are alive. The trust is managed by a trustee, who can be the grantor or someone else chosen by the grantor. The trustee holds legal title to the assets on behalf of the beneficiaries, who are named by the grantor and can include family members, friends, or charitable organizations.

Living trusts have several advantages over other estate planning tools. For example, they allow assets to pass to beneficiaries without going through probate, a court-supervised process that can be time-consuming, expensive, and public. This means that the beneficiaries can receive their inheritance faster and with less hassle. Additionally, living trusts can provide more flexibility and privacy than wills, which are subject to public record.

To create a living trust, the grantor must draft a trust document that specifies the terms of the trust, such as who the beneficiaries are, what assets are included, and how the trust should be managed. The grantor must then transfer legal ownership of the assets to the trust, which can be done by changing the title of the assets to the name of the trust. It is also common for the grantor to name themselves as the initial trustee, giving them continued control over the assets during their lifetime. However, the grantor must also name a successor trustee to take over management of the trust if the grantor becomes incapacitated or dies.

Living trusts are commonly used by individuals who want to protect their assets and provide for their loved ones after they pass away. They are especially popular among those who own real estate or other valuable assets that they want to pass on to their beneficiaries with minimal complications. However, living trusts can also be used for other purposes, such as charitable giving or business succession planning.

What are the benefits of a living trust?

There are several benefits to creating a living trust, which include:

1. Avoiding probate. One of the primary benefits of a living trust is that it can help you avoid probate, which is the court-supervised process of settling an estate. Probate can be time-consuming and expensive, and it can also be a public process, which means that your estate and your beneficiaries’ inheritances become a matter of public record. By creating a living trust, you can transfer your assets to the trust, which means that they are no longer considered part of your probate estate. This can help your beneficiaries receive their inheritances faster and with less hassle.
2. Providing flexibility and privacy. A living trust can also provide more flexibility and privacy than a will. Unlike a will, which becomes a matter of public record when it is filed with the court, a living trust is a private document that is not filed with the court. This means that the terms of the trust and your beneficiaries’ inheritances can remain private. Additionally, a living trust can be more flexible than a will, as it can provide for the management of your assets in the event that you become incapacitated, as well as after your death.
3. Protecting assets. A living trust can also provide protection for your assets. For example, if you are concerned about leaving assets to a beneficiary who may be vulnerable to creditors or who may not be able to manage the assets responsibly, you can use a living trust to provide for the management and protection of those assets.
4. Reducing estate taxes. Depending on the size of your estate, a living trust can also be used to reduce or eliminate estate taxes. By transferring assets to a living trust, you may be able to take advantage of estate tax exemptions and reduce the overall value of your estate.
5. Ensuring a smooth transition of assets. A living trust can help ensure a smooth transition of assets to your beneficiaries. By providing for the management and distribution of your assets in a clear and organized way, you can help minimize the potential for conflict among your beneficiaries.

What are the potential pitfalls to living trusts?

While a living trust can provide many benefits, there are also potential pitfalls to consider. These include:

1. Cost. One potential pitfall of a living trust is the cost of setting it up. Creating a living trust typically involves legal fees, which can be higher than the cost of creating a simple will. Additionally, there may be ongoing fees associated with managing the trust, such as trustee fees, accounting fees, and tax preparation fees.
2. Complexity. A living trust can be more complex than a will, and it may require more time and effort to set up and manage. For example, the grantor must transfer ownership of assets to the trust, which may involve changing the title of property, updating beneficiary designations, and transferring ownership of financial accounts. Additionally, the trustee must manage the trust and ensure that its terms are followed, which can be time-consuming and complicated.
3. Loss of control. By transferring assets to a living trust, the grantor may lose some degree of control over those assets. For example, if the grantor names a trustee to manage the trust, they must rely on the trustee to make decisions that are in the best interest of the beneficiaries. Additionally, the grantor may not be able to make changes to the trust once it is established, depending on the type of trust created.
4. No asset protection. While a living trust can provide protection for assets in some situations, it does not provide asset protection in all cases. For example, if the grantor is sued or faces other legal claims, assets held in a living trust may still be vulnerable to creditors.
5. Possible delays in receiving assets. While a living trust can help avoid probate and ensure a smooth transition of assets to beneficiaries, there can still be delays in receiving assets from the trust. For example, if the trustee needs to liquidate assets to pay debts or taxes, it may take time to distribute the remaining assets to beneficiaries.